June 10 (Bloomberg) -- Foreign banks are projected by
Goldman Sachs Group Inc. to lend less money against commodity
inventories in China amid a probe into metals stockpiles in the
biggest consumer of raw materials.

Claims that single batches of copper and aluminum at
Qingdao Port were pledged as collateral for multiple loans risks
undermining a broader practice in which traders use everything
from iron ore to rubber to get funding. The investigation is
already weighing down copper prices and may curb foreign
exchange inflows to China, according to a report by Goldman.

The probe may affect metals stockpiles at the northeastern
port held by Citic Resources Holdings Ltd., the trader
controlled by China’s largest state-owned company said today.
Standard Chartered Plc said last week it was reviewing financing
to some companies in China and Standard Bank Group started
looking at “potential irregularities” with metals at Qingdao.
Citigroup Inc. said it would work closely with authorities and
warehousing companies to resolve any problems for clients.

“The developments in Qingdao are likely to continue the
significant scaling back of FX inflows from foreign banks into
China via commodity financing business,” analysts at New York-based Goldman said in the report dated yesterday. “As foreign
banks reduce their exposure to Chinese commodity financing
deals, the profitability of these could be reduced
meaningfully.”

Price Drop

Copper in London may fall to $6,200 a metric ton before the
end of this year, analysts including Roger Yuan and Max Layton
said in a report. Benchmark three-month futures on the London
Metal Exchange slumped 9.7 percent this year and traded at
$6,645 at 5:45 p.m. Shanghai time, putting them on course for
the lowest closing price since May 1.

Currency flows may be affected because Chinese borrowers
often use commodities as collateral to get low interest loans
from overseas lenders in dollars. They then bring the money
onshore to invest in the nation’s higher interest rate
environment before later repaying the sum.

Qingdao Port said in a June 6 statement that public
security authorities were probing alleged fraud involving
material held in its Dagang bonded storage area.

Public security authorities in Qingdao have not responded
to calls by Bloomberg News seeking comment.

“The authenticity of warehouse receipts is critical to the
practice of inventory financing in bonded warehouses,” Barclays
Plc analyst Sijin Cheng wrote in a report last week. “Feedback
from trading house contacts suggests that this investigation has
cast a pall on the financing trade as a whole.”

Port Shares

Shares of Qingdao Port International Co., which listed on
the stock exchange in Hong Kong on June 5, have fallen 3.5
percent from their offer price to $HK3.63 today.

The investigation is into the owner of some metals and a
third party storing them in the Dagang area and not Qingdao Port
itself, according to the June 6 statement.

“The company continues to provide regular port services to
other clients and for all metal ore products, including aluminum
and copper products,” it said.

Separately, some Chinese banks have raised margins for
letters of credit for iron ore financing to as much as 50
percent from as much as 30 percent previously, said two people
with knowledge of the matter.

Others reduced overall credit available for iron ore
financing and set a cap on credit used in some locations
including Rizhao, a port located about 100 kilometers (65 miles)
southeast of Qingdao, according to the people, who asked not to
be identified because they aren’t authorized to speak publicly.

Locked Gates

The Dagang area has been sealed and gates to the area are
chained and padlocked, Reuters reported. The amount of metal
involved in the probe was about 20,000 tons of copper, almost
100,000 tons of aluminum ingots and about 200,000 tons of
alumina, Reuters said, citing a source it didn’t name.

Jiangxi Copper Co., China’s biggest smelter of the metal,
said the problems at Qingdao don’t represent a systemic risk and
won’t hurt demand or production of industrial metals.

As well as industrial metals, Qingdao port also handles
iron ore and agricultural commodities including cotton and
rubber.

Shanghai is China’s biggest port and storage center for
industrial metals. Copper inventories in bonded zones in
Shanghai were estimated to be about 815,000 tons in April by
CRU, a London-based consultant. Citrine Capital Management LLC
said in June that stockpiles in bonded warehouses across China
may be about 900,000 tons.

The probe will make China’s banks “extremely cautious”
about financing deals, though lenders will continue to help fund
shipments to end-users, Colin Hamilton, Macquarie Group Ltd.’s
head of commodities research, said June 4.

Some copper may be moved from China to LME warehouses in
South Korea, and possibly Singapore and Malaysia, Jeremy
Goldwyn, head of business development in Asia for Sucden
Financial Ltd., said June 5.